Fannie Mae-No Politics (FNMA)

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Fannie and Freddie investors turn to the ‘people’s court’

By Gina Chon in Washington



©Bloomberg

A US court better known for hearing tax refund complaints has become the preferred venue for shareholder lawsuits against the US government over its rescues of AIG, and mortgage finance companies Fannie Mae and Freddie Mac.

Located near the White House and the imposing Treasury Department – one of the agencies often cited in this recent spate of lawsuits – the Court of Federal Claims is based in a nondescript red-brick building that is easy to miss.

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This façade suited its image as the “people’s court,” as it was the venue that heard all kinds of money claims against the US government – for tax refunds, contract work and both civilian and military pay.

But, more recently, the court has gained a reputation for lending a sympathetic ear to major investors angry about government bailouts – including former AIG chief executive Hank Greenberg, who has sued the government over the $182bn bailout of the insurance group and is seeking $40bn in damages.

The Federal Claims court is also where Bruce Berkowitz’s Fairholme Funds has sued the government over the profits of mortgage finance companies Fannie Mae and Freddie Mac, which received a $188bn bailout in 2008. In August, Bill Ackman’s Pershing Square filed a similar lawsuit against the government over Fannie and Freddie in the Federal Claims court.

Other courts have thrown out cases like these. Last week, a US District Court dismissed a separate Fairholme lawsuit over Fannie and Freddie. An appeals court also rejected claims by Mr Greenberg in another AIG lawsuit, and the US Supreme Court declined to hear his case in June.

However, the Federal Claims court has so far allowed Fairholme’s lawsuit on Fannie and Freddie to proceed, and proceedings in Mr Greenberg’s AIG case began at the end of September.

“The complexity of the submissions and the factual disagreements strongly point to the need for a trial,” Federal Claims judge Thomas Wheeler said of the AIG case.

As a result, former Treasury secretaries Hank Paulson and Tim Geithner and former Federal Reserve chairman Ben Bernanke are all attending the Federal Claims court this week for that case.

“It is increasingly being seen as the place to go for these kinds of cases,” said one lawyer who has appeared before the court. “The judges there think these cases have enough merit to at least hear them out. They are seeing something that other courts have not seen.”

But Lewis Wiener, head of the Federal Claims Bar Association, said the shareholders in the financial crisis lawsuits will not necessarily have the upper hand, as they are up against tough lawyers from the Department of Justice

“The court has a lot of integrity and sympathies don’t play into it,” said Mr Wiener, a partner at Sutherland Asbill & Brennan. “The government is represented by excellent attorneys so it’s a pretty fair fight.”

Both the AIG and Fannie-Freddie lawsuits accuse the government of violating the US constitution because shareholders allege they were not justly compensated for the takeover of the companies. All of the companies have recovered, and the government has received payments from them that exceed the total it committed to bail them out.

The government has argued it had the authority to rescue the companies in the way it did because of the severity of the financial crisis, and noted that the purpose of the bailouts was to save the US economy, not benefit the shareholders.

Already, proceedings in the AIG case have been affecting the Fannie-Freddie suit – even though they are distinct and being heard by separate Federal Claims judges. Earlier this year, the US government argued that it should not be forced to release certain documents in the Fannie-Freddie case because sealed testimony by Messrs Geithner, Paulson and Bernanke in the AIG lawsuit had been leaked to the media.

Federal Claims judge Margaret Sweeney said she would impose restrictions to guard against leaks in the Fannie-Freddie case. Messrs Geithner and Paulson could be called to give evidence in that case as well.

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